Two Slovenian banks fail ECB stress tests

By bne IntelliNews October 27, 2014

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Slovenia’s two largest banks, Nova Kreditna Banka Maribor and Nova Ljubljanska Banka, were among 25 European banks revealed to have capital shortfalls, according to an assessment published by the European Central Bank on October 26. Both Slovenian banks are up for privatisation after being bailed out by the government in late 2013. 

The European Central Bank (ECB) found problems at 25 of the EU’s largest banks, although acknowledged that half had already taken measures to address their capital shortfalls.

In addition to the two Slovenian banks, nine Italian banks, three banks each from Greece and Cyprus, two Belgian banks, and one bank each from Austria, France, Germany, Ireland and Portugal failed the tests, which assessed the resilience of the 130 largest banks in the Eurozone as of December 31, 2013.

The ECB reported a total capital shortfall of €25bn at the 25 banks, whose asset values need to be adjusted by €48bn. Italy’s Monte dei Paschi bank racked up the largest capital shortfall - €2.1bn. However, 12 of the banks have already covered their capital shortfall by increasing their capital by €15bn in 2014. 

“This unique and rigorous exercise is a major milestone in the preparation for the Single Supervisory Mechanism, which will become fully operational in November,” said ECB vice president Vitor Constancio in a statement. “This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”

The Bank of Slovenia said in a statement published later on October 26 that the situation at Nova Kreditna Banka Maribor (NKBM) and Nova Ljubljanska Banka (NLB) had improved since 2013. A third Slovenian bank, SID banka, was included in a parallel set of stress tests, also released on October 26 by the European Banking Authority (EBA). 

The Bank of Slovenia said that none of the Slovenian banks assessed would show a capital shortfall by the end of 2016 under the baseline scenario of the stress test. It also pointed out that measures had been taken at NKBM and NLB to address their capital shortfall. “The effects of the restructuring improved profitability in 2014 to the extent that the identified capital shortfalls will be covered by retained profits,” the bank said. 

“Last year’s recapitalisation was merely a minimum necessary condition for the final recovery of the banking system, not a sufficient condition,” the bank adds. “A longer-term improvement of the banking system and new impetus in credit and economic growth will only be possible after the realisation of radical measures in the area of the operational, ownership and financial restructuring of the real sector.”

In December, the Slovenian government announced a €4.8bn rescue plan to recapitalise the country’s largest banks, narrowly averting the need for an international bailout. Under the plans, the three largest banks had their capital ratios increased to 15%, above the EU average. Ljubljana said it planned to finance the recapitalisaton of the banks that had accumulated around €9.5bn worth of bad loans, or 20% of total loans, by selling off both NKBM and Slovenia’s third largest bank Abanka, as well as at least 75% of NLB.

NBKM is close to completing a restructuring programme and selling off non-core assets including its leasing operations. The privatisation process for the bank is now reaching its final stages. Slovenia Sovereign Holding, which is managing the privatisation process, said on October 9 that it had received several offers for the purchase of 100% of NBKM. 

The bank, which had a €31m capital shortfall reported by the ECB, also responded to the report with a <a href="http://www.nkbm.si/content/13051/Nova-KBM-exceeds-the-requirements-set-f...">statement</a> that 2013 had been “a year that was probably the most challenging one in decades for Nova KBM”. The bank said it now exceeds the requirements set for the baseline stress test scenario. 

NLB has also reported a turnaround since 2013. In July, the bank said it expected to return to profitability this year following a €1.44bn loss in 2013. While the privatisaton process for NLB and other companies stalled in the run up to the July general elections, the new government under Prime Minister Miro Cerar has indicated it will go ahead with the sales of state owned companies. 

The banks revealed by the ECB to have capital shortfalls must prepare plans to address the situation within the next two weeks. They will then have up to nine months to carry out their plans. 

The European Commission, which welcomed the results from the ECB and EBA, said on October 26 that, “Rigorous and timely follow-up actions to the results of the exercises will be absolutely crucial.”

The EC will also ensure that any follow up efforts are in line with EU law. “Our priority will be to ensure that any capital shortfalls are met from private sources” the EC said. “If, however, state support is needed, the Commission will apply EU State Aid rules ... which ensure a level playing field in the single market and that any public support is limited to the minimum necessary.”

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